The U.S. Federal Reserve released an 86-page report on March 24 detailing the reasons for rejecting Custodia Bank’s application to join in January, including the bank’s foray into the crypto space.
According to the report, the Fed’s board raised “concerns about the concentration of business plans in a narrow sector of the economy” by banks whose activities are highly concentrated in areas related to the cryptocurrency industry. The report states: “For Custodia, these concerns are further exacerbated by the fact that it is an uninsured depository institution focused almost exclusively on providing products and services related to the crypto asset sector, which poses heightened illicit financial and security soundness risks.”
The document also states that Fed members must align their risk management systems and controls with the activities described in their business plans. According to the Fed's terms of reference, "Custodia has not developed an adequate risk management framework for its proposed cryptoasset-related activities, nor has it addressed the highly relevant risks associated with its single business model."
If admitted as a member of the system, Custodia Bank would be further prohibited from operating crypto-related services “in light of the speculative and volatile nature of the crypto asset ecosystem,” which is inconsistent with the purpose of the Federal Reserve Act. The report states: “Additionally, if the board approves Custodia’s application for membership, it will prohibit Custodia from engaging in some of the novel and unprecedented activities it proposes to undertake at least until Bank Negara allows it to be undertaken as a settlor”
In response to the report, Custodia Bank spokesperson Nathan Miller told Cointelegraph, “The recent Fed order is the result of numerous procedural anomalies, factual errors the Fed has refused to correct, and a general bias toward digital assets.”
Miller also noted that the decision showed the Fed was "short-sighted and unable to adapt to changing markets." Miller further stated, "Perhaps focusing more on real risk areas would have prevented banks from closing, and Custodia was created to avoid that. Regrettably, Custodia had to turn to the courts to assert its rights and force the Fed to comply with the law "
The bank claimed that the Fed report was 14 times longer than the previous longest denial order and 41% longer than the longest Fed denial order on any topic. In late January, the Fed rejected Custodia Bank's membership request, and a second application in February, claiming its application "did not meet elements required by law."
